Turkey: Corporate Governance 2016 - Turkey

This article was originally published in the International
Comperative Legal Guide to Corporate Governance 2016

Setting the Scene – Sources and Overview

1.1 What are the main corporate entities to be discussed?

The corporate entity under Turkish Law that may offer tradeable
shares to the public is the joint stock company
("JSC"). Our replies below are
structured so as to capture corporate governance issues both from
the perspective of closely and publicly held JSCs. In addressing
the issues pertaining to publicly held JSCs, we have made a
distinction between listed and non-listed JSCs, where
necessary.

1.2 What are the main legislative, regulatory and other
corporate governance sources?

The main legislative and regulatory sources in relation to
corporate governance in Turkey are:

Turkish Commercial Code no 6102
("TCC") and the underlying
legislation;

Capital Markets Law no 6362
("CML");

Communiqué on
Corporate Governance ("CGC");

Communiqué on public
disclosure of material events (II-15.1)
("Communiqué no
II-15.1");

Communiqué on public
disclosure of material events concerning corporations whose shares
are not traded on the stock exchange (II-15.2)
("Communiqué no
II-15.2").

The Ministry of Customs and Trade
("Ministry") acting through its
provincial Trade Registry directorates is responsible for the due
implementation and enforcement of the corporate governance
principles embodied in the TCC and the underlying secondary
legislation.

In the field of capital markets, it is the Capital Markets Board
("CMB"), an independent regulatory and
supervisory authority that is in charge of the application and
enforcement of the CML in general and, in particular, the corporate
governance-related secondary legislation. The CMB is also empowered
by law to regulate the capital markets by way of issuing secondary
legislation which usually takes the form of regulations,
Communiqués and principle resolutions, all of which
are of a binding nature. The main duty of the CMB is to ensure the
fair and orderly functioning of the capital markets, while
protecting investor rights. In order to achieve this goal, it
determines the terms and conditions for the due operation of
capital markets and capital market institutions. It is also
responsible for cooperating with other financial regulatory bodies
in order to ensure financial stability. From among the CMB
Communiqués enlisted above, all of them are
mandatory, except for the Communiqué on Corporate
Governance, which is compulsory only for certain publicly held
JSCs.

Borsa Istanbul A.Ş. ("Borsa
Istanbul"), formerly named the Istanbul Stock
Exchange, was founded at the end of 1985 and was demutualised in
2013 following the enactment of the CML. For the time being, it is
the only exchange in Turkey where securities, derivatives and
commodities are being traded. It has some self-regulatory authority
on its members, but decisions on major important issues are subject
to the approval of the CMB. The principles regarding: listing,
de-listing, trading and suspension of trading; transmitting and
matching of orders; performing in due time obligations related to
executed trades; granting of authorizations to trade at the Borsa
Istanbul; operation, audit and surveillance systems of the Borsa
Istanbul; and establishing, operating and managing markets, etc.
are set forth under the Regulation on Exchange Business Activities
of Borsa Istanbul A.Ş. which was published in the Official
Gazette no 29150 dated October 19, 2014.

Apart from the foregoing, the Turkish Capital Markets
Association ("TCMA"), a self-regulatory
organization, sets forth professional rules of conduct and monitors
the members to provide a fair and disciplined capital market. It
issues and implements regulations on the subjects determined by law
or by the CMB. All investment firms, banks that are authorized for
capital market operations, portfolio management companies and
investment trusts are required to become members of the TCMA.

As far as the constitutional documents of the corporate entities
are concerned, Articles of Association
("AoA") encompass, among others, the
main corporate governance rules. According to common practice, AoA
mirror the mandatory provisions of the TCC regarding corporate
governance. In addition to these, companies which voluntarily
choose to adopt those principles of law which are of a non-binding
nature may insert in their AoA appropriate provisions to this end.
The AoA, and therefore any corporate governance rule contained
therein, is binding on the shareholders, Directors and the JSC and
third parties.

1.3 What are the current topical issues, developments, trends
and challenges in corporate governance?

The TCC, which came into force in 2012, does not include a
catalogue of corporate governance principles; however, it
introduces certain mandatory provisions with respect to corporate
governance. On the other hand, CML came into force in 2012 within
the context of modernisation of the rules that govern capital
markets in Turkey. In contrast with the TCC, the secondary
legislation issued under the CML contains corporate governance
principles, some of which are optional and some of which are
compulsory.

The replacement of outdated legislation, which could no longer
respond to the needs of the developing Turkish economy, is later
followed by the enactment of certain supplementary legislation such
as the CGC, which became applicable in 2014.

In terms of corporate governance, TCC has wider application, in
the sense that its provisions are applicable both to closely held
and publicly held JSCs, whereas the CML exclusively applies to
publicly held JSCs.

The CMB is conferred with the authority under TCC and CGC to
determine the corporate governance principles that will be
applicable to public companies, as well as which of those
principles shall qualify as mandatory in nature and which ones
shall be optional.

The current challenges to corporate governance in Turkey, as
further explained below, can be listed as i) lack
of legal provisions regulating indemnity of Directors,
ii) the immature practice of obtaining
Directors' liability insurance, iii)
Directors' personal liability for any outstanding public
receivables owed by the JSC, and iv) auditing not
being compulsory for the companies which are not subject to
compulsory independent auditing.

Apart from the above, the State has strong influence in Turkish
economy and expropriation is quite common. The number of public
companies in the market is quite low and most companies are owned
by families.

Shareholders

2.1 What rights and powers do shareholders have in the
operation and management of the corporate entity/entities?

Rights and powers with respect to the operation and management
of the corporate entity are vested in the Board of Directors
("BoD") as explained at section 3
below.

Save for the minority's rights as described below,
shareholders do not hold any unmediated operational or managerial
powers individually, with the exclusion of a few indirect
management rights explained below. However, certain powers are
granted by law to the General Assembly of Shareholders
("GAS") and have direct effect on the
operation and management of a JSC. These non-transferable powers
are:

Amendment of the AoA of the JSC.

Appointment, discharge and release
from liability of Directors, determination of their term of office,
attendance fee and premiums.

Election and discharge of auditors of
the JSC, as required by law.

Distribution of dividends.

Dissolution of the JSC.

Wholesale of a substantial part of
the JSC's assets.

Apart from the foregoing, shareholders who own a minimum of 10%
of the share capital in a closely held JSC and a minimum of 5% of
the share capital in a publicly held JSC are specified as
"minority shareholders" under the TCC,
and as such qualify for exercising a set of special rights related
to corporate governance. These rights are:

Right to request the convocation of
the GAS from the BoD; failing which, from the competent commercial
court.

Right to request the insertion of a
subject in the agenda of the GAS.

Right to postpone the deliberations
on the balance sheets and financial accounts.

Right to request the replacement of
the auditor of the JSC by way of a lawsuit subject to certain
conditions.

Right to veto the discharge of
Directors, founders and auditors of the JSC from liability
concerning foundation of the JSC and any capital increase.

Right to request the dissolution of
the JSC on the basis of justified reasons.

Right to request the attendance of a
Ministry representative to the GAS meetings.

Right to be represented at the BoD if
it is regulated under the AoA of the JSC.

Right to request the appointment of a
special auditor by the commercial court, in cases where a previous
request on the same issue that was directed at the GAS was
dismissed.

Finally, the following rights of shareholders which relate to
the management of the JSC can be exercised by a shareholder,
individually:

Right to request cancellation of GAS
resolutions, subject to certain conditions.

Right to request information from the
BoD on the operations of the JSC, and the method of auditing used
by auditors and its results at GAS meetings.

Right to examine commercial books and
related correspondences of the JSC subject to the consent of the
BoD.

Right to apply to the court in cases
where any of the JSC's compulsory organs cease to exist due to
e.g. vacation of seats in the case of the BoD and consequent
incapability to satisfy meeting quorum.

2.2 What responsibilities, if any, do shareholders have as
regards the corporate governance of their corporate
entity/entities?

Participation, representation and voting at the GAS are
essential rights and responsibilities vested in shareholders. As
explained below, GAS is the primary decision-making organ of a
JSC.

Save for those particular rights which are exclusively vested,
by law, in the GAS and shareholders as explained at question 2.1
above, shareholders do not, in principle, hold any responsibilities
in terms of corporate governance. Nevertheless, in cases where the
AoA expressly specifies any particular issues or transactions which
require shareholders' approval, the JSC can only engage in the
transaction concerned or take any action as regards to the issue at
hand subject to the said GAS approval. At present, there are no
particular statutory provisions,
Communiqués,decrees, nor any settledpractices of
the regulatory bodies (in the case of publicly held companies)
which set forth any codes of conduct which the shareholders should
sign up to in engaging with the companies they invest in or which
encourage them to take more interest in and/or exercise more
control over corporate governance issues. However, as explained
above, there is no legal impediment to regulate this issue in
detail in the AoA, and grant wider rights than usual to the GAS in
terms of corporate governance. It should also be noted that those
powers of the BoD which are specified by law as non-transferable
cannot be conferred upon the GAS.

2.3 What shareholder meetings are commonly held and what rights
do shareholders have as regards them?

GAS meetings are commonly held in two types: (i) ordinary GAS
meeting; and (i) extraordinary GAS meeting. It is mandatory for
companies to hold an ordinary GAS meeting within three months of
the end of each fiscal year. In accordance with the TCC, the
following issues should be discussed and resolved at an ordinary
GAS meeting:

Election of the BoD, and if
applicable, the auditors of the JSC.

Discussion and approval of financial
statements and annual activity report of the BoD.

Determination of profit and its
distribution.

Release of members of the BoD.

Decisions on other necessary issues
related to the relevant fiscal year of the JSC.

On the other hand, extraordinary GAS meetings can be held as and
when needed.

2.4 Can shareholders be liable for acts or omissions of the
corporate entity/entities?

Shareholders who are not BoD members, nor specifically
designated agents of the JSC, do not, in principle, have any
liability for acts or omissions of the JSC.

Although Turkish statutory law does not adhere to the doctrine
of lifting the corporate veil in the practice of the Turkish Court
of Cassation, there are just a few precedents whereby shareholders
were personally held liable for the acts of the JSC in accordance
with the general principle of objectivegood
faith embodied in Article 2 of Turkish Civil Code no 4721, and
a set criteria applied by court.

2.5 Can shareholders be disenfranchised?

The squeeze-out of the shareholders from the JSC can occur in
the following circumstances:

In cases where a holding JSC holds,
directly or indirectly, 90% of the shares and/or voting rights in
its subsidiary, and the minority shareholder hinders effective
operation of the subsidiary, behaves against the principles of
good faith, creates significant distress and/or acts in an
imprudent fashion, the holding JSC can buy the minority's
shares out at its market price, if any, or at the price defined in
the TCC. This rule does not apply to publicly held JSCs.

In cases where the subscription
obligation was not fulfilled in whole or in part by the shareholder
concerned despite the request of the BoD, the BoD has the right to
deprive the defaulting shareholder of its right to make the
required subscription payment.

In cases where the minority
shareholders file a lawsuit on justified grounds for the
termination of the JSC, the court may decide on the buy-out of the
minority shareholders' shares at their real market value,
instead of deciding on the termination of the JSC.

With regard to public companies, in
cases where the voting rights attached to publicly held shares,
which were acquired by way of tender or any other means, reached or
exceeded the thresholds determined by the CMB, the acquiring
shareholders have the right to squeeze out the minority
shareholders.

Apart from the foregoing, where any dealings or transactions
bear any particular link between the shareholder, his spouse, his
lineal kinship or their proprietorships or the companies owned or
controlled by any of these on one side, and the JSC on the other
side, a shareholder is deprived of its voting rights. Directors and
authorized signatories holding executive positions cannot use their
voting rights at GAS in respect of any shares they may hold with
respect to the decisions which concern their acquittal.

2.6 Can shareholders seek enforcement action against members of
the management body?

Shareholders have the right to take legal action against
Directors and demand compensation for JSC and themselves in cases
where the Directors concerned wrongfully breached any of their
duties and responsibilities under the law or AoA. The
Directors' liability is a fault liability.

2.7 Are there any limitations on, and disclosures required, in
relation to interests in securities held by shareholders in the
corporate entity/entities?

As a rule, there are no restrictions in relation to interest in
securities held by shareholders.

However, with regard to publicly held JSCs, the shares of which
are not traded at the stock exchange, there are certain disclosure
requirements in respect of the quantity and acquisition price of
the shares acquired by any shareholder, as well as any other
information that may affect decisions of the investors.

With regard to public companies, it is obligatory to make a
public disclosure, in the case that the total voting rights held by
any real person or legal entity shareholder, or others acting in
concert together with the said shareholder, reaches 5%, 25%, 50%,
67% or 95% of the share capital or drops below any of these
percentages, or in cases where a direct or indirect change in
management control occurs by way of a contract or other means.

Under the Foreign Direct Investment Law, companies with foreign
capital are obliged to notify the General Directorate of Incentive
Practices and Foreign Capital of any share transfers made by, and
between, the existing local and foreign shareholders.

Finally, share transfers may trigger approval requirements under
the applicable anti-trust laws, and depending on whether they
involve any particular regulated sector, they may be subject to the
prior approval of the regulatory body concerned, and, in the case
of publicly held JSCs, of the CMB.

3 Management Body and Management

3.1 Who manages the corporate entity/entities and how?

The management body of a JSC is the BoD. The BoD is vested with
the authorities to manage and represent the JSC. Both of these
powers are, in principle, transferable subject to certain
limitations prescribed by law. Turkish Law adheres to the
single-board system. Hence, there is no separate supervisory body
and supervision powers lie with the GAS.

The management power of the BoD can be delegated, wholly or
partially, to one or multiple Directors or third party individuals,
provided that the AoA of the JSC expressly allows such delegation
and the BoD issues and registers with the Trade Registry an
internal directive specifying the persons to whom and to what
extent the management powers are delegated. Subject to the
limitations described below, the BoD may appoint a Director as CEO
or a non-Director CEO from outside the BoD. In this case, the BoD
remains vested with those management rights which are specified by
law as non-transferable. These non-transferable rights are (i)
high-level management of the JSC, (ii) to form the managerial
structure of the JSC, (iii) to supervise those who are responsible
for the day-to-day management of the JSC including the CEO and
operation directors, (iv) to ensure compliance with law, AoA,
internal directives and written instructions of the BoD, (v) to
keep the book of shares of the JSC, minutes of BoD and GAS
meetings, and (vi) to conduct the preparations for GAS meetings and
to execute GAS resolutions.

Unless specified otherwise under the AoA and unless the BoD is a
single Director BoD, the power to represent the JSC is exercised
with the joint signatures of two Directors. In cases where the
representation authority is delegated to a single non-Director, one
BoD member must also retain the power to represent the JSC. Upon
the delegation of the representation authority, Directors who no
longer have the power to represent the JSC become non-executive
Directors, whereas those conferred with the power to represent the
JSC become executive Directors.

The BoD can set up committees or commissions for the purposes of
monitoring the operations of the JSC, preparing reports on
specified issues, ensuring the due application of its resolutions
and providing an internal control mechanism.

In companies, the shares of which are traded at the stock
exchange, the BoD must establish a committee for early detection of
risks so as to determine any development which may potentially pose
a threat to the existence, growth or continuation of the JSC and to
take measures, as appropriate.

Additionally, the CGC contains mandatory provisions regarding
the establishment of certain committees, including the nomination
committee and the remuneration committee.

3.2 How are members of the management body appointed and
removed?

BoD members are initially appointed by the AoA at the stage of
incorporation. Subsequent members are appointed by the GAS. The
maximum tenure for BoD membership is prescribed as three years
under the TCC, and Directors can be re-elected. The BoD can consist
of one or multiple members and the TCC does not set out an upper
threshold for the number of Directors. Nevertheless, the CGC
regulates that JSCs whose shares are traded on the stock exchange
shall have at least five Directors, the majority of which must be
non-executive. Among these non-executive Directors must exist what
the CGC refers to as independent Directors, the selection criteria
for whom are also listed thereunder. At least one-third of the BoD
must be comprised of independent Directors.

Directors do not have to be a citizen of the Republic of Turkey
and foreign individuals and corporates can act as Directors in
JSCs.

Legal entities can be designated as Directors; in which case, a
real person representative must be appointed to serve on the BoD on
behalf of them.

Certain share groups, group of shareholders or minority
shareholders can be granted the right to be represented at the BoD,
if the AoA so provides.

In cases where a Director's seat becomes vacant due to his
death, resignation or dismissal within his tenure, the BoD can
temporarily appoint a new Director until the immediately following
GAS. The temporary member will then be voted in or out by the GAS
at this meeting.

The BoD membership of a Director shall cease automatically, if
such BoD member is declared bankrupt, loses his/her legal capacity
or can no longer meet any special requirements stipulated in the
AoA or the applicable legislation. Additionally, BoD members can
always be dismissed by way of a GAS resolution, even if such
dismissal was not on the meeting agenda.

3.3 What are the main legislative, regulatory and other sources
impacting on contracts and remuneration of members of the
management body?

The TCC and CML both contain provisions regarding the
remuneration of Directors, according to which salary, bonus,
premium and/or meeting attendance fees can be paid to Directors.
Directors can be allotted a certain share from the annual profit of
the JSC, provided that the amount of these payments are determined
under the AoA or by way of a GAS resolution and legal reserves and
dividends are duly allocated.

Pursuant to the CML, Directors cannot receive a share from the
annual profit in publicly held companies, unless the legal reserves
and dividends are duly allocated.

3.4 What are the limitations on, and what disclosure is
required in relation to, interests in securities held by members of
the management body in the corporate entity/entities?

Under the TCC, there are no limitations in terms of the value or
percentage of shares which a Director can hold in a JSC. With that
being said, a Director who holds a stake exceeding the thresholds
specified by law becomes subject to the disclosure requirements
explained under question 2.7, above.

3.5 What is the process for meetings of members of the
management body?

There is no prescribed form of convocation for BoD meetings. It
is permissible for all or some Directors to attend and vote in BoD
meetings in an electronic environment, provided that certain
requirements listed under the TCC, e.g. that the JSC must have a
website allocated for this purpose, are duly satisfied. The
frequency of BoD meetings can be determined in the AoA. In any
case, the BoD can convene at any time it deems necessary. Unless a
higher quorum is specified under AoA, the BoD shall convene with
the simple majority of its members and pass resolutions with the
affirmative votes of the majority of those who attend, regardless
of whether the meeting is held physically or electronically. If
none of the Directors calls for a physical meeting, BoD resolutions
can be passed by way of one Director drafting a resolution template
containing his proposals, sending it to all Directors in the JSC
and obtaining the written approval of the majority of the BoD.

The chairman does not have a privileged vote, and in the case of
equal votes, a second meeting must be held. If there is still a tie
in votes in the second meeting, the proposal is deemed to have been
refused.

The CGC sets forth certain principles regarding BoD meetings,
which are not compulsory in nature and only advisory.

3.6 What are the principal general legal duties and liabilities
of members of the management body?

The main fiduciary duties of Directors can be listed as the duty
of acting diligently and prudently, the duty of loyalty and
non-compete and the duty of care. The TCC stipulates that Directors
who breach their duties, as defined by the law and AoA, by way of
fault, shall be liable for any losses and damages caused against
the JSC, shareholders and JSC creditors. Unless a distinction was
made between executive and non-executive Directors or the duties of
the BoD were transferred to a CEO, all Directors should hold
appropriate professional skills and experience reasonably required
in the corporate field of activity of the JSC. In addition, the
Directors should, in all their acts and dealings, observe and
respect the rights and interests of the JSC and the shareholders
within the framework of the applicable laws and the AoA. The
liability of Directors in publicly held JSCs is more extensive. In
the case of public offerings, any loss, which may be sustained by
investors due to any inaccurate, misleading and incomplete
information included in the prospectus can be demanded from the
Directors who are proved to be at fault, subject to certain
conditions. Furthermore, Directors shall be liable for damages
arising from the interim financial statements failing to reflect
the actual status of the JSC or not being prepared in accordance
with the legislation and the accounting principles and rules
adopted by the JSC.

3.7 What are the main specific corporate governance
responsibilities/functions of members of the management body and
what are perceived to be the key, current challenges for the
management body?

Generally speaking, to the extent that the AoA provide for the
setting-up of special committees for internal control systems,
early risk detection and risk assessment or management processes
and systems and the like, the BoD shall be responsible for forming
these committees from among the company personnel with the
appropriate level of expertise and qualifications, and where
necessary, outsource any associated ancillary services. Each of
these committees will operate under the supervision of, and report
to, the BoD. Thus, ultimate liability for ensuring that the subject
committees fulfill their duties in compliance with the law and the
objectives drawn up in the AoA is vested in the BoD. Moreover,
unless the members of any committee are called in to brief the
shareholders on any specific issue, the liability for reporting and
informing the GAS about the committees' performances is vested
in the BoD. In regard to the key current challenges faced by the
management body, it would not be incorrect to state, particularly
from the perspective of closely held JSCs, that corporate
governance still remains a not well-settled area. This is mainly
because, except for big conglomerates and companies operating in
regulated sectors, many closely held JSCs are family-run
businesses.

Even though statutory law keeps up quite well with the
fast-changing world and its trends, locally owned corporates
generally remain slow in implementing the corporate governance
rules in their practices.

In contrast with the foregoing, companies operating in regulated
sectors, such as banking, insurance and electrical energy, as well
as publicly held JSCs, observe and comply with the corporate
governance rules quite successfully.

As for the current challenges for the BoD, one of the biggest
risks Directors presently face is such that they are not insulated
against personal liability for any public debts of the JSC, which
remain outstanding. Pursuant to Law on the Collection Procedure of
Public Receivables no 6183 ("Law no 6183"), where public
receivables cannot be collected from the JSC's assets,
Directors shall be personally liable for such receivables.

Another big challenge for the BoD derives from the
non-compulsory nature of the Directors' liability insurance,
the market for which is quite immature in Turkish insurance
industry. It is currently not common practice for companies to pay
for the said insurance product since Turkish insurers have to
reinsure their liability under Directors' liability insurance
policies in order to be able to face any potential claim, which
indirectly increases the premium amounts companies have to pay.

Finally, there is no specific legislation under Turkish Law
stipulating that companies must indemnify their Directors against
personal liability caused by reasons beyond their control and
despite their lack of fault. Although it is not a prohibited
practice, the lack of any mandatory legal provision concerning the
matter causes companies to not include any provisions in their AoA
to this effect. As a result, combined with the problems regarding
Directors' liability insurance, Directors are exposed to a
wider range of risks under Turkish Law, and have to seek protection
on the basis of general provisions of law.

3.8 What public disclosures concerning management body
practices are required?

The CGC includes compulsory disclosure requirements concerning
independent Directors and members of the committees, if any.

Communiqué no II-15.1, which applies to public companies
whose shares are traded on the stock exchange, requires any
information regarding Directors who may potentially affect
investors' decisions or the value of capital markets
instruments to be disclosed.

Similarly, Communiqué no II-15.2 contains
disclosure requirements concerning Directors or their activities
such as any resolution passed concerning a planned merger, the
change of the JSC's field of activity and any criminal
proceedings initiated against Directors.

3.9 Are indemnities, or insurance, permitted in relation to
members of the management body and others?

Please refer to our explanations set out at question 3.7
above.

4 Transparency and Reporting

4.1 Who is responsible for disclosure and transparency?

Under the TCC and relevant law, BoD can be explained as the key
corporate body in relation to corporate governance related
disclosure. Article 375 of the TCC provides that along with its
other non-transferable duties and authorities, the BoD is
responsible for preparing the annual activity report. It is further
responsible for preparing the financial statements of JSCs in
accordance with the Turkish Accounting Standards
("TAS"). The BoD is also responsible for
preparing a corporate governance compliance report
("Compliance Report") and submitting it
to the GAS as one of its inalienable duties. In addition to the
above, in the case of JSCs that are subject to independent audit,
BoD shall establish a corporate website and ensure that the website
contains the relevant information stipulated under the law. BoD
members are accountable for breach of their duties concerning
corporate website and its required content. For a detailed
explanation regarding corporate websites, please refer to our
answer to question 4.4.

Apart from the foregoing, in accordance with Article 15 of the
CML and the Communiqué no II-15.1, listed companies
shall disclose to the public the information, events and
developments which may affect the value and price of capital market
instruments or the investment decision of investors. Information,
events and developments which qualify as "material
events" shall be disclosed by the company officer designated
and authorized to use a secure electronic signature through the
Public Disclosure Platform ("PDP"). Any
listed corporations, the capital market instruments of which are
not traded at the exchange or are traded exclusively in certain
specified markets of the stock exchange are exempt from the
obligation to disclose information at the PDP as provided under the
Communiqué on Public Disclosure Platform
(VII-128.6).

4.2 What corporate governance related disclosures are
required?

As explained in our answer to question 4.1 above, annual
activity report of the BoD is one of the primary documents utilized
in disclosing the financial status of the JSC. The Regulation on
the Minimum Contents of the Annual Activity Reports of Companies
provides that certain matters shall be addressed in the annual
activity report. This includes i) general information on the
relevant financial year, structure of the JSC; in particular, its
share capital, shareholders and organization, ii) business
activities and significant developments, e.g. information on the
investments made, internal control systems and auditing activities,
etc., iii) financial status of the JSC, i.e. assessment of risks
and of the management's performance, the level of
accomplishment in undertaking the planned business activities,
situation of the JSC in view of the designated strategic targets,
etc., and iv) information on the risk management policy of the JSC
and a forecast on potential risks concerning sales, efficiency,
revenue generation capacity, profitability, debt/equity ratio and
similar matters. Apart from them, disclosure should also be made on
any financial benefits extended to Directors and executive
officers.

In regard to publicly held JSCs, Corporate Governance Principles
("Principles") annexed to CGC contain
rules similar to those explained for closely held JSCs in the
preceding paragraph. Article 8 of the CGC regulates that annual
activity reports should specify whether the applicable disclosure
requirements are duly satisfied by the JSC. As per the decision of
the CMB dated 27.02.2014 and numbered 2/35, a similar disclosure
should also be made in the Compliance Report. Apart from the
disclosure of material events, listed companies are required to
disclose various information at the PDP in relation to the
structure and practice of the GAS and BoD under the CCG and the
Principles.

The last primary source of corporate governance related
disclosure and transparency is the corporate website. Please refer
to our answer to question 4.4 for detailed information on the
requirement to establish corporate website and the relevant content
to be published.

4.3 What is the role of audit and auditors in such
disclosures?

Independent audit of JSCs is regulated in Articles 397 to 406 of
TCC. In accordance with Article 397/4, JSCs which are subject to
independent audit are determined by the Resolution of the Council
of Ministers numbered 2012/4213. The criteria for designating such
companies under the Resolution is reset each year. On the other
hand, concerning the auditing of companies which are exempt from
independent audit TCC provides that the rules and principles for
auditing of such companies will be determined under a Regulation to
be prepared by the Ministry and published by the Council of
Ministers. It should be emphasized that such regulation has not
been issued yet.

The main purpose of independent audit is defined by law so as to
form an objective opinion on the financial standing of a JSC in
view of the applicable laws and internal early risk detection and
management systems adopted by the JSC and by means of an in-depth
review of the financial tables, annual activity report of BoD and
any other financial information pertaining to the JSC which may be
procured by auditors in the course of their audit. JSCs which are
subject to independent audit requirement shall specify at the
outset of their financial tables and BoD's annual activity
report that these have been duly audited and also, explain the
opinion of their auditors. In the absence of a duly conducted
audit, financial tables and annual activity report shall be
considered as null and void.

With regard to independence of auditors, Article 400/1 enlists,
on a non-exhaustive basis, persons who shall not qualify as
auditors. These include shareholders, managers, or employees of the
JSC to be audited, persons who are legal representatives, BoD
members, managers or legal owners of a corporation associated with
the JSC to be audited, who work at a company that has dealings with
the JSC to be audited or has more than 20% share in such a JSC, who
have undertaken works for or have contributed to the bookkeeping or
preparation of the financial statements of the JSC to be audited
other than the auditing itself. Furthermore, Article 400/2 of the
TCC regulates that if the same person or entity was appointed as an
auditor for a JSC for a total period of seven years in the last 10
years, the said auditor cannot be re-appointed for at least three
years. An auditor is also prohibited from providing advisory
services to a JSC he audits except for in cases concerning tax
advisory and tax audit, and to conduct this through any subsidiary
JSC under Article 400/3 of the TCC.

Apart from the foregoing, listed companies are required to
comply with Principle 4.5.9 with respect to the formation of audit
committees which will report to BoD. Accordingly, in these JSCs, an
audit committee shall be formed to supervise the corporation's
accounting system, the making of required public disclosures, the
appointment of independent auditors and overviewing the operation
and efficiency of internal control and internal audit system.
Election of independent auditors, initiation of the independent
audit process by concluding required engagement contracts with
independent auditors and overviewing the works of independent
auditors at all stages are among the duties of the audit committee.
The audit committee shall disclose its evaluations on the
veridicality and accuracy of the annual and interim financial
statements to the public and accounting principles observed by the
corporation to the BoD in writing, together with the opinions of
the responsible executives and independent auditors of the
corporation. There shall be an explanation in the annual report
with regard to the activities and meeting results of the audit
committee.

4.4 What corporate governance information should be published
on websites?

Article 1524 of the TCC provides that companies which are
subject to independent audit requirement shall set up a website
within three months as from the date of their incorporation. BoD
members and managers of companies who fail to set up the JSC
website and publish the required content on it shall be charged
with a fine as regulated under Article 562/12 of the TCC.

According to Article 6 of the Regulation on the JSC Websites
("Regulation on Websites"), the
following information shall be published on the JSC's website
on a permanent basis;

The JSC's Central Registry
Recording System ("MERSIS") number,
commercial name, head office, subscribed capital, paid-in capital,
and names and surnames of the president and members of the
BoD.

In the case of legal entity
Directors, the MERSIS number of this legal entity Director,
commercial name, head office, and the name and surname of its
registered representative.

The name and surname/title,
residence/head office and registered offices, if any, of the
selected auditor.

On the other hand, along with certain other content specified in
the Regulation, the below information shall be posted at the
website for a minimum period of six months:

Any merger agreements, merger report,
financial tables and reports pertaining to last three years'
and interim financial statements shall be placed on the JSC's
website for a review by shareholders within 30 days before the
scheduled date of the GAS meeting.

Calls for GAS meetings and GAS
resolutions amending the AoA.

The GAS minutes of the JSC.

The decision of the BoD regarding the
appointment of the signature powers. Internal directive of the
GAS.

In addition to above, the Principles set forth certain rules
regarding corporate websites which are compulsory for publicly held
companies whose shares are traded on the Borsa Istanbul.

Apart from the foregoing, according to Article 24 of the
Communiqué no II-15.1, within no later than one
business day immediately after the date of disclosure of any
material event to public must publicly held JSCs publish their
subject disclosures at their corporate website. The disclosed
information must be retained on the website for a period of five
years.

5 Miscellaneous

5.1 What, if any, is the law, regulation and practice
concerning corporate social responsibility?

Corporate Social Responsibility
("CSR") is not regulated under TCC.
Nonetheless, there are a few pieces of legislation, such as the
Protection of Consumers Law no 6502 and Renewable Energy Law no
5346, which include provisions aiming at minimizing any negative
impact which may be caused by the acts or omissions of corporations
on wider community.

Principles also include a section on CSR issues which are of a
non-compulsory nature. The Principle 3.5 entitled "Ethical
Rules and Social Responsibility" sets forth that the
operations of the corporations shall be carried out in accordance
with the ethical rules of conduct, with a special emphasis on the
protection of the environment, consumers and public health.

With regards to disclosure requirements concerning CSR,
Principle 2.2.2 states that information on social rights granted
to, and professional trainings organized for the employees and any
CSR activities arranged in connection with the corporate field of
activity of the company, and which produce any positive effects on
the society and environment shall be included in the
corporation's annual reports.

5.2 What, if any, is the role of employees in corporate
governance?

There is no specific rule under the legislation regarding the
role or importance of employees in corporate governance, be it as
whistle-blowers or otherwise. Similarly, there is no concept of
works councils in Turkish Law presently in force.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

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Trust structures will often involve trustees holding shares in companies; those shares forming part of the trust fund held by the trustees for the benefit of the trust and the beneficiaries as a whole.

The Department of Finance has taken the first step towards implementing a central register of the beneficial ownership of trusts, as required by the Fourth and Fifth Money Laundering Directives

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